• Led by an appallingly incompetent German management, the European Union will most probably come out terminally fractured after next May’s parliamentary elections.
  • The political forces already at work in a number of countries will go back to nation states and a free-trading area, abandoning the pipe dream of a European statehood and sovereignty.
  • That may not scuttle the euro because such a free-trading area needs a common currency to be a genuine customs union and a homogeneous single market.

(above) German Chancellor Angela Merkel and Prime Minister Theresa May are seen during a press conference on July 10, 2018 in London, England.

Britain’s idea of a united Europe has never been more than a free-trading area.

In spite of that, the Germans and the Dutch liked the prospect of sharing the European Union membership with British free-traders, apparently as a counterweight to overbearing French state interventionists.

Having twice vetoed in the 1960s the British entry into what was then called the European Common Market, France eventually relented and agreed to Britain’s accession in 1973.

Soon, however, France and other EU members had to deal with British “opt-outs” from legislative and regulatory provisions London was finding contrary to its government traditions and requiring sovereignty transfers to unelected officials running the European Commission in Brussels.LIVE, NEWS-MAKING DISCUSSIONS
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Nearly three years after the successful referendum to leave the EU, Britain is now in the final stages of negotiating its exit.

Germany planted the seeds of destruction

Although the form of the British exit from the EU is often presented as a reductionist binary choice — “a no-deal exit” or “a deal the U.K. and the EU can live with” — London has in effect restated the fundamental question of what is a European project: A Europe of sovereign nation states, or a federal European super-state.

The disastrous fiscal austerity policies imposed by German Chancellor Angela Merkel on sinking euro area economies at the beginning of this decade, and her subsequent disorderly open-door immigration waves in 2015 have been a catalyst and a detonator of strong centrifugal forces throughout the European Union.

In response to cataclysmic shocks of the Great Recession, Merkel set out to teach a lesson to euro area “fiscal miscreants” and those unable to control their banks (Spain). In the process, she rebuffed American President Barack Obama’s request to ease up on her devastating fiscal austerity, because Washington was rightly concerned that a deep and intractable European recession would hit hard one-fifth of American exports.

To those calling for some European solidarity, Merkel retorted that it’s everybody for themselves, with Germany continuing to live off its trade surpluses with the euro area partners while pursuing a “black zero” budget balance.

Presidential candidate and later President Donald Trumpunderstood all that. He told Merkel that trade free-riding on the U.S. was over, and so was Washington’s total underwriting of German security. Apparently shocked by the lack of American solidarity (stupidity), Merkel’s response was that “Europeans truly have to take our fate into our own hands.” In other words, never mind, Germany will continue to bilk Europe.

That, however, was too late for Merkel and Germany. Her policies have led to the extreme-right xenophobic Alternative for Germany (AfD) shooting up from zero votes in 2013 to the country’s third-largest political party now.

And that was also an eye opener for some smarter Europeans. When the Hungarians saw that Merkel was going to direct refugees their way, Budapest said it didn’t want Berlin to decide who was going to live in Hungary.

Berlin and a Berlin-run European Commission were outraged at that lack of Hungary’s European solidarity. Worse, an arrogant German EU budget commissioner publicly threatened that he would cut off regional development funds to which Hungary was entitled.

France’s ‘civil war’

Germany got its next comeuppance in Italy. Rome finally summoned the courage to say “basta!” (enough!), after being left alone for years to handle thousands of African and Middle-Eastern migrants and refugees landing on its shores. Berlin’s only response to Italian appeals for European solidarity was to criticize Rome for refusing to honor the maritime traffic laws and to secure people in danger.

To get back at Italy for refusing to follow Germany’s diktat on immigration policies, Berlin led the assault, with its French sidekicks, on Italy’s attempts to rescue its sinking economy with fiscal policies that were well within the euro-area budget rules.

Germany and its EU Commission now got exactly what they wanted: The Italian economy sank into recession late last year, and will probably remain there for most of 2019.

The story is not over, though. Italy is now teaming up with Hungary and Poland to create an anti-German and anti-French block, with unpredictable consequences for the EU’s future.

All that is happening at a time when France is split by a violent and deepening social unrest — some conservative French thinkers call a “civil war,” in a country prone to “violence” and “revolutions.” The government has no answer to three months of demonstrations and rioting of a social movement dubbed “yellow vests.” Watching an increasingly violent police warfare, the French governing elites are organizing town hall discussions, apparently believing that they can wear down, and wait out, their opponents.

But, as things now stand, there seems no end to the French political crisis. Last Saturday, for example, about 60,000 people demonstrated and rioted in all major French cities, confronted by 80,000 police in lethal combat gear.

For the time being, the French government is hanging on thanks to massive police operations and the fact that the rioting social groups have neither the leadership nor the programs that would offer viable alternatives for the transition of power in the quasi-imperial presidential system of the Fifth Republic.

By comparison, a weak and disoriented German government looks like a paragon of stability. The governing coalition forces can’t wait to see Merkel’s back, the right-of-center CDU/CSU sister parties are still settling their differences, and their hapless Socialist (SPD) partners are looking for a major leadership change.

And everybody is waiting to see what political forces will emerge from the European parliamentary elections in late May. The event is billed as a decisive showdown between established and highly contested governing circles, and what are derisively called “populist” demagogues and illiberal democracies.

Investment thoughts

That huge European mess is exactly what Trump and the U.K. need to settle their trade scores with a disintegrating European Union.

Will the euro survive all that?

The probability is very high that it will. The euro is in the hands of the European Central Bank, and no member country now has an overwhelming anti-euro constituency.

Upon reflection, the Europeans will also realize that a demise of the euro would herald Germany’s total political, economic and financial domination of a system of fragmented European states. The long pre-euro experience shows that no country could be protected from that by managed or free-floating exchange rates. The German central bank would then be on par with the U.S. Federal Reserve, and the Bundesbank’s president would reclaim its old role as a lecturer-in-chief on world economy and finance.

But many in Europe would find such a German domination unacceptable. Europe’s old demons would soon take over, and Washington would have to step in to keep the erstwhile European “brothers” off each other’s throats.

And here is how Henry Kissinger talks in his memoirs about a most humiliating history lesson he received on that topic from the towering French President Charles de Gaulle. Egged on by President Richard Nixon, during his visit to France in the 1960s, to challenge de Gaulle’s ideas about Germany, Kissinger piqued the haughty general with the question how he would prevent Germany from dominating Europe. De Gaulle’s answer was simple: “Through war.”

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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